March 25, 1999
Europe Sees a Boom in Mergers and Acquisitions
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By EDMUND L. ANDREWS
ARIS -- It looks, some say, like a European replay of the 1980s
on Wall Street: hostile takeovers, poison pills, white knights and
an endless stream of high-priced investment bankers pitching new
deals.
Certainly, Europe has never seen anything quite like it. LVMH
Moet Hennessy Louis Vuitton is trying to buy Gucci Group of Italy.
Gucci is seeking refuge by teaming up with yet another French
raider, Francois Pinault.
Meanwhile, Olivetti, an Italian computer and communications
equipment maker, is making a hostile bid for Italy's biggest phone
company. And France's largest banks are in a three-way takeover
brawl that has amazed both the country's financial elite and the
French government.
For all the adventurism, though, something big is missing.
Despite the talk of an integrating Europe driven to get together by
its new single currency, very few deals so far involve cross-border
transactions between European companies.
Instead, many of the mergers seem intended at keeping foreigners
-- especially other Europeans -- at bay. Indeed, many such deals are
explicitly promoted on nationalistic grounds.
When Banque Nationale de Paris announced a surprise bid to take
over its two main rivals, its chairman noted that "there are three
main banks in France and they should remain in French hands." In
Italy, the head of Olivetti appealed to the same sentiments in
justifying his $58 billion hostile bid for the national telephone
company.
"You still have a tendency of viewing banks or industrial
corporations as national treasures," said Herbert Aspbury, head of
client management at Chase Manhattan in Europe. "This is probably
the first step or a necessary consolidation process, but I don't
think the second step of cross-border mergers will happen
quickly."
Indeed, Europe's biggest cross-border deals have been with
American companies. Daimler-Benz took over Chrysler Corp. Deutsche
Bank is acquiring Bankers Trust. Koninklijke Ahold, a big Dutch
supermarket company, bought Giant Food in the Washington-Baltimore
area.
Within Europe itself, national deals have been the rule. Banque
Nationale de Paris shocked the French establishment two weeks ago
by launching a hostile takeover attempt against Banque Paribas and
Societe Generale, just a month after those two announced their own
plans to merge.
The French battle follows major bank mergers in Switzerland,
Spain and Germany. Indeed, Switzerland's two largest banks, UBS and
Swiss Bank Corp., set the pace a year ago by forming the world's
biggest bank.
The pattern has continued. Just last Sunday, Italy's four
biggest banks announced plans for two separate takeovers worth
about $26 billion in all.
Nationalism prevails as well in fields like car manufacturing.
The French government has made it clear it would almost certainly
block any attempt to buy Renault, in which it still owns 44 percent
of the shares. But it is willing to allow Renault to buy a 35
percent share of Japan's Nissan Motor. Fiat of Italy is out of
reach, because the Agnelli family retains firm control through a
convoluted network of affiliated companies.
Mergers have run aground even in the defense industry, where
European governments badly want their national aerospace companies
to unite in a single powerful enterprise. Those plans have been
derailed by deep disagreements among British, French and German
companies.
The exceptions seem to prove the rule, too. In what would be one
of Europe's biggest cross-border deals, Hoechst AG of Germany and
Rhone-Poulenc of France announced plans in December to merge their
pharmaceutical businesses. But that deal is on shaky ground, in
part because the two companies worked so hard to be politically
correct.
Not only did Hoechst and Rhone-Poulenc agree to pool their
shares in a "merger of equals," they also agreed to build a new
headquarters in Strasbourg, as close to the border between France
and Germany as it is possible to get.
That was all well and good. The problem was that most experts
believe Hoechst is worth more than Rhone-Poulenc. That generated
complaints from Hoechst's biggest shareholder, Kuwait Petroleum
Corp., which is worried about being short-changed and has still not
given its approval.
To be sure, the merger frenzy does signal a revolution in
European business practices. The clubby corporate networks, in
which banks and conglomerates hold each other's stocks, are
breaking down. Companies that once relied on their local bank to
raise money are now turning to global stock and bond markets. As a
result, European executives are more exposed to unwanted takeovers
if their companies' shares sink.
But the upshot is a jarring blend of new-age buccaneering and
more old-fashioned national protectionism.
The tension between these impulses is particularly vivid in
European banking, which has always been a politically sensitive
industry.
The most recent such evidence came this weekend, when four of
Italy's biggest banks announced two separate mergers. Unicredito
Italiano, itself the product of a smaller merger two years ago,
said it would acquire Banca Commerciale Italiana for $16 billion in
stock. San Paulo-IMI, Italy's biggest banking group, said it would
buy Banca di Roma for $9.7 billion in stock.
But the biggest brawl is here in Paris, where bankers and
political leaders had become increasingly alarmed by the merger
mania under way from Switzerland to Spain.
At a black-tie dinner hosted by France's top bank executives
last December, France's finance minister warned the bankers they
were in danger of being left behind.
"Too often in the past, infighting in France has prevailed
against preparation for the future," said Dominique Strauss-Kahn,
the finance minister. "Today, the following question is posed: How
do you -- how do we -- wish to manage these indispensable reforms?"
The message was clear: The banks had to pull together or risk
being brushed aside. Indeed, the three biggest had already been
sounding each other out for more than a year. Michel Pebereau,
chairman of Banque Nationale de Paris, known universally by its
initials BNP, had fruitlessly courted Societe Generale. Banque
Paribas, which focuses on investment and corporate banking, had
repeatedly insisted that it did not want to merge with an ordinary
commercial bank.
"In France, we were very late in restructuring our banking
industry," said Laurent Treca, a board member of BNP. "Many of
the things taking place here had already occurred elsewhere in
Europe -- in Italy, in Spain, in Belgium. But in France, there were
no major moves on French banks."
Meanwhile, the government was desperately trying to privatize
the deeply troubled state-owned bank, Credit Lyonnais. Having
bailed out the government-owned bank from billions of francs worth
of bad loans in everything from French real estate to a Hollywood
studio, officials were (and still are) trying to sell off the
sanitized institution and its new management.
But the French government made it clear it did not want its big
banks in foreign hands. Bidding rules for Credit Lyonnais blocked
any institution from acquiring more than 10 percent, and industry
executives argue that French regulators would have simply blocked
foreigners from taking over one of the three big healthy banks.
Foreign rivals were certainly interested. Rolf-Ernst Breuer,
chairman of Deutsche Bank AG in Frankfort, repeatedly told analysts
and investors that he wanted to form an alliance with a French
bank. He even proposed buying a significant stake in Credit
Lyonnais.
Though French regulators never explicitly blocked Deutsche Bank,
Breuer concluded that he could never make an acceptable deal. Last
month, he announced that Deutsche Bank would simply build its own
skeleton structure of 10 bank branches in France.
But French banks were also under pressure from one of France's
most influential financial figures, Claude Bebear, chairman of the
French insurance conglomerate AXA. AXA holds about 6 percent of
BNP's shares and 7 percent of Paribas'. AXA executives sit on both
boards.
Bebear, who had built AXA into a global giant by acquiring
companies as varied as Equitable Group in the United States and
Union Assurances de Paris, had been chafing for a merger for a long
time.
"What he thinks is that French banks are too small and not
profitable enough," said Christophe Dufraux, a spokesman for AXA.
"If French banks want to be among the top players -- the way we did
it in insurance -- they needed to change."
Industry experts say Bebear shook things up last October, when
he publicly criticized Banque Paribas for failing to convince
investors of the wisdom of its strategy. Though the comments were
measured, French banking executives immediately interpreted them as
a wake-up call for Paribas.
Andre Levy-Lang, chairman of Paribas, continued to insist
throughout last fall that he still did not want to merge with a
retail bank. But he apparently changed his views in private, and
opened up talks with Societe Generale.
When Paribas and Societe Generale announced their plan in early
February for a $16 billion merger, French government officials were
ecstatic. Strauss-Kahn called the merger "a direct response" to
his wishes and said it would lead to "a strong and dynamic French
financial sector."
Pebereau said very little, but hired Goldman, Sachs & Co. as his
investment banker to map out a response. He got some help from
investors, who disliked the proposed merger and pushed down the
value of both Paribas and Societe Generale in the stock market.
On March 9, BNP announced an unsolicited tender offer for all
the stock in both of its rivals. Pebereau, whose move stunned
government officials, was also quick to wave the French tricolor.
"Our country is capable of dominating this sector on a global
scale," he said. "Through this alliance, we do not risk losing
personality and culture."
Bebear of AXA publicly sided with Banque Nationale de Paris last
week. But analysts say it is far from clear that BNP will prevail.
The offer must still clear several hurdles with French regulators,
and the target banks may well fire back with a higher offer of
their own.
Regardless of who wins, the deeper question is whether France
and indeed other European countries become more open to
cross-border mergers.
Breuer, of Deutsche Bank, politely announced in Frankfurt last
week that he would stay out of the fight unless he was invited in.
"What is happening in front of our eyes in France right now is
very French," he said at a news conference to discuss his own
company's results last week. "The nature of the process does not
allow a foreign bank to get involved."
